What’s Keeping Institutional Money Away from Cryptos?
Uncertainty about regulations, a lack of trusted custodians and concerns about security are key factors that continue to deter many large financial institutions from trading cryptoassets, says Kevin Beardsley, a managing partner at B2C2.
Amongst these three factors, Beardsley cited the lack of regulatory clarity around cryptoassets as the biggest issue for these firms right now, pointing out that no major bank wants to clash with their regulators for trading in what is, relatively speaking, still a small marketplace.
“The large institutions are all waiting for the regulations to become clear, which is a very rational approach,” he says.
Beardsley describes the lack of safe, trusted, fully insured and independently audited custodians in the crypto space as “a gaping hole” in terms of the infrastructure that is needed to attract more institutional flows.
In terms of the security concerns, he comments: “If you ask most people that trade in the industry, I think they’ll tell you that counterparty risk is the single biggest risk – as in the exchange might explode or $500 million might go missing.”
Beardsley also addresses the fact that, while bitcoin remains the largest and most widely traded cryptocurrency, its overall market share appeared to decrease substantially in 2017.
As Profit & Loss previously noted, according to CoinMarketCap, a website that tracks cryptocurrency market capitalisations, in March 2017 bitcoin accounted for roughly 85% of the overall cryptocurrency market capitalisation, whereas by March 2018 that figure was down to about 35%.
However, Beardsley explained why such figures can be misleading.
“When people talk about the market cap of a crypto, what they’re actually thinking about is the price of the token times the number of tokens in existence, it’s a rough proxy for market cap of a publicly traded firm…The trouble with that is that it creates a really perverse incentive where you can create a very small number of tokens and price them very high and your market cap becomes 1 billion, 10 billion, 100 billion – you can make it basically as high as you’d like it to be – and it’s very easy to game that system,” he says.
Beardsley continues: “So when people say bitcoin’s dominance has fallen in terms of market cap, yes, there have been other entrants, but the much bigger factor I think is other people gaming the system to make it look like their market cap is artificially high.”
Elsewhere in the interview, Beardsley discusses why crypto trading will remain a largely regional game, the high correlations that exist between different cryptoassets and why the launch of bitcoin futures was a major step forward for the industry.
The full interview can be watched here: